Case Note & Summary
The litigation comprised a writ petition under Article 32 and a civil appeal by special leave challenging orders passed by the State Government of Uttar Pradesh under Section 34 of the U.P. Co-operative Societies Act, 1965, nominating two-thirds of the total members of the committee of management of the U.P. Co-operative Federation Ltd. The Federation and its elected chairman Veerpal Singh were the petitioners/appellants; the State of U.P. and others were respondents. The annual general meeting of the Federation was held on 30 March 1970, and the committee of management was elected. Veerpal Singh was unanimously elected Chairman on 8 April 1970. On 19 September 1970, the State Government passed an order under Section 34 nominating two-thirds of the committee members, claiming that its shareholding had crossed 60% of the total share capital. The Allahabad High Court stayed that order but ultimately dismissed the Federation's petition on 8 December 1970. The State Government cancelled the first order on 18 December 1970 after an Additional Registrar's inspection report indicated that the State had been misinformed about its share capital. Subsequently, on 26 June 1971, the State Government passed a second order under Section 34 again nominating two-thirds of committee members. The Federation and Veerpal Singh challenged this second order by writ petition and also pursued the civil appeal against the High Court's decision on the first order. The undisputed facts showed that the Federation's subscribed and paid-up share capital on 30 June 1969 was Rs.34.04 lakhs, of which the State Government owned shares worth Rs.20 lakhs, i.e., about 58.75%. The State Government argued that in January 1970, the Federation terminated the membership of some co-operative banks holding shares worth Rs.53,000, and that in September 1970, the District Co-operative Federation, Saharanpur retired Rs.50,000 out of its share capital of Rs.1,51,000. These reductions, according to the State, brought the total paid-up share capital down to Rs.33.01 lakhs, making the State's Rs.20 lakhs more than 60%. The petitioners/appellants contended that neither the co-operative banks' shares nor the Saharanpur Federation's shares were validly reduced from the share capital; they asserted that on 26 June 1971, the total share capital was Rs.40,17,000 including those shares, so the State's shareholding was only about 49.81%. The core legal issue was whether the condition precedent under Section 34 of the U.P. Co-operative Societies Act, 1965 – that the State Government must hold at least 60% of the total share capital – was satisfied. The Court first addressed the alleged termination of co-operative bank memberships. It held that the provisions of the Act and Rules indicated that the banks did not cease to be members, as there was no resolution removing them from membership. Rule 32 provided that there is no reduction of share capital unless shares are transferred or member removed; the shares still stood in the name of the banks, so the share capital was not reduced by Rs.53,000. Next, the Court considered the Saharanpur Federation's alleged retirement of Rs.50,000. It held that the Saharanpur Federation was still a member, not removed from membership, and its share money could not be taken out of the share capital fund and treated as security. Even if the shares were kept as security, they remained in specie; thus, the share capital was not reduced by Rs.50,000. Consequently, in both cases the shares remained part of the share capital, and the State Government's shareholding never reached the 60% threshold. The Court therefore concluded that the State Government was not justified in exercising its right under Section 34; the nomination orders were invalid. The Court did not find it necessary to decide the constitutional challenges under Article 14 or the other contentions, as the fourth contention succeeded. The writ petition was allowed and the civil appeal was disposed of accordingly.
Headnote
A) Co-operative Societies - Nomination of Committee Members - Condition Precedent of 60% State Shareholding - Section 34, Uttar Pradesh Co-operative Societies Act, 1965 - The State Government claimed its shareholding crossed 60% after alleged termination of co-operative bank memberships and retirement of Saharanpur Federation's shares; the Court examined whether the total share capital was actually reduced and held that the State's shareholding remained below 60%, so the nomination orders were without jurisdiction. (Paras Not mentioned) B) Co-operative Societies - Membership Cessation and Reduction of Share Capital - Rule 32, Uttar Pradesh Co-operative Societies Rules, 1968 - Co-operative banks were not removed by any resolution; their shares were not transferred, and the share capital was not reduced; the shares still stood in the name of the banks, so the claimed reduction of Rs.53,000 was invalid. (Paras Not mentioned) C) Co-operative Societies - Retirement of Share Capital and Shares in Security - Rule 32, Uttar Pradesh Co-operative Societies Rules, 1968 - District Co-operative Federation, Saharanpur was still a member and its share money could not be taken out of share capital fund and treated as security; even if shares were in security, they remained in specie, so the reduction of Rs.50,000 did not occur. (Paras Not mentioned) D) Constitutional Law - Judicial Restraint on Constitutional Challenge - Article 14, Constitution of India and Section 34, Uttar Pradesh Co-operative Societies Act, 1965 - The Court declined to decide the contentions regarding naked power, Article 14 violation, and arbitrary exercise because the condition precedent under Section 34 was not fulfilled; the fourth contention succeeded, making the first three academic. (Paras Not mentioned)
Issue of Consideration
Whether the State Government could nominate two-thirds of the members of the committee of management of the Federation under Section 34 of the U.P. Co-operative Societies Act, 1965 when its shareholding was claimed to be 60% or more, and whether the alleged termination of co-operative bank memberships and retirement of Saharanpur Federation share capital actually reduced the Federation's total share capital.
Final Decision
The Supreme Court allowed the writ petition and held that the State Government was not justified in exercising its right under Section 34 of the U.P. Co-operative Societies Act, 1965 because its shareholding did not meet the 60% threshold; the alleged reductions of share capital by Rs.53,000 and Rs.50,000 were invalid, and the nomination orders dated 19 September 1970 and 26 June 1971 were without jurisdiction. The civil appeal was disposed of accordingly.
Law Points
- Section 34 nomination requires State Government shareholding of 60% or more
- reduction of share capital only upon member removal according to rules
- shares kept as security remain in specie and do not reduce share capital
- State cannot exercise nomination right based on alleged termination of membership without actual transfer of shares
- Rule 32 and bye-law 38(b) govern membership and share capital
